Markup is a percentage added to your cost. Margin is the share of the selling price that is profit. A 20 per cent markup gives a margin of about 16.7 per cent, not 20, and mixing the two up is how builders and tradies end up busy and short of money.
This article is arithmetic only. It uses example numbers, not industry averages. Swap in your own.
Markup and margin are not the same number
Both describe the gap between what a job costs you and what you charge. They differ in what they divide by.
- Markup is profit divided by cost.
- Margin is profit divided by price.
Because the price is always bigger than the cost, margin is always the smaller percentage for the same job. The business.gov.au pricing page tells owners to work out the total cost of the product or service and then add a markup or margin. It does not say which one or how to calculate either (business.gov.au on pricing strategy). That gap is the reason for this article.
The one line of arithmetic to remember
If you want a particular margin, do not add that percentage to your cost. Divide your cost by one minus the margin.
Price = cost ÷ (1 − margin)
Want a 20 per cent margin? Divide by 0.80. Want 30 per cent? Divide by 0.70. Going the other way, if you know your markup, price is cost times (1 plus markup).
A worked example (labelled as an example)
Say a job costs you $10,000 in materials, labour and subcontractors. These figures are made up for the example.
| What you do | Price | Profit | Real margin |
|---|---|---|---|
| Add 20% markup | $12,000 | $2,000 | 16.7% |
| Add 25% markup | $12,500 | $2,500 | 20.0% |
| Add 30% markup | $13,000 | $3,000 | 23.1% |
| Divide by 0.80 (aim for 20% margin) | $12,500 | $2,500 | 20.0% |
| Divide by 0.70 (aim for 30% margin) | $14,286 | $4,286 | 30.0% |
Look at the last two rows. To earn a 30 per cent margin you need a markup of about 43 per cent, not 30. On a $10,000 cost that is the difference between $13,000 and $14,286, or $1,286 you did not charge for work you still did.
Where overheads and the owner’s wage go
The cost in your sum has to be all of it. Materials and the wages of people on the job are the easy part. The bits that get left out:
- Insurance, licence fees, vehicles, tools, phone and software
- Office time, quoting time and time spent on quotes that do not sign
- Your own wage for the hours you spend running the business, not only working on the tools
- Callbacks and fixing defects after handover
The business.gov.au page lists materials, labour, overheads and taxes, including GST, as costs to include before adding a markup or margin. One way to handle overheads is to add up a year of them, divide by the number of billable hours you expect, and carry that figure on every job. Those are your own numbers to work out. Nobody else’s average will do it for you.
Quoting time is an overhead too. If you spend 6 hours pricing a job and win one in three, the real cost of winning that job is closer to 18 hours of quoting. That example is only a method. Run it with your own win rate. Our guide to what a lead is worth to your business walks through the same idea from the enquiry side.
Pricing small jobs against big ones
Small jobs carry the same fixed costs as big ones. Travelling to site, writing the quote, ordering, invoicing and chasing payment take roughly the same time on a $2,000 job as on a $20,000 one.
Two ways builders handle it, and both are fair if the client can see them:
- A minimum job charge or call-out fee, stated up front
- A higher margin target on small jobs, because the fixed costs are a bigger share of the price
On large jobs a lower margin can still earn more dollars. As an example, a 12 per cent margin on a $400,000 build is $48,000, and a 25 per cent margin on a $4,000 repair is $1,000. What matters is whether the dollars cover your overheads, your wage and a return on the risk you carry.
Checking a finished job against the quote
A quote is a guess until you check it. When a job finishes, tally what it actually cost you and compare with what you priced.
- Total actual cost, including every hour, supplier invoice and subcontractor
- Price you were paid, including approved variations
- Profit: price minus cost
- Margin: profit divided by price
If actual margin keeps coming in under what you aimed for, the problem is usually one of three things. Labour hours were underestimated, allowances were too low, or variations were done and never charged. Fixing one line item in your next quote is worth more than lifting every price by a few per cent.
When the scope is unclear, paid early work lets you price from facts instead of guesses. See how much to charge for a preliminary agreement, and for renovations and extensions our renovations and extensions page. The quote follow-up service picks up after the price goes out.
Common questions
Is markup the same as profit margin?
No. Markup is profit divided by cost. Margin is profit divided by price. For the same job, margin is always the smaller number.
How do I turn a margin into a markup?
Divide the margin by one minus the margin. A 20 per cent margin is 0.20 divided by 0.80, which is a 25 per cent markup.
What margin should a builder aim for?
There is no single right figure. It depends on your overheads, your wage and the risk in the job. Work it out from a year of your own costs, then check finished jobs against it.
Is GST part of the markup?
No. Work out cost, markup or margin and price before GST, then add GST on top if you are registered. Check with your accountant for your situation.